Continuing with Toys-4-Kids, introduced in the preceding problem, the company's production manager has argued for years that it is inefficient to produce on a seasonal basis. She believes the company should switch to level production throughout the year, building up finished goods inventory in the first two quarters to meet the peak selling needs in the last two. She believes the company can reduce its cost of goods sold from 70 percent to 65 percent with level production.

l4. Continuing with Toys4Kids, introduced in the preceding problem, the company's production manager has argued for years that it is inefcient to produce on a seasonal basis. She believes the company should switch to level production throughout the year. building up nished goods inventory in the rst two quarters to meet the peak selling needs in the last two. She believes W the company can reduce its cost of goods sold from 70 percent to 65 percent with level production. (Keep in mind that production managers typically want to restrict production to left shoes only so as to reduce costs.) a. Prepare a revised pro forma forecast assuming level production In your forecast. assume that quarterly accounts payable under level production equal 10 percent of average quarterly sales for the year. To estimate quarterly inventory, use the following two formulas: Quarterly Inventory\": = Inventory.\" + Quarterly production cost of sales Quarterly production = Annual cost of sales/4 where eoq and boq refer to end of quarter and beginning of quarter, respectively. Please ignore the effect of increased external nancing required on interest expense. b. What is the effect of the switch from seasonal to level production on annual prots? c. What effect does the switch have on the company's quarterly ending inventory? On the company's quarterly need for external nancing? d. Do you think the company will be able to borrow the amount of money required by level production? What obsolescence risks does the company incur by building up inventory in anticipation of future sales? Might this be a concern to lenders? ToysAKids 2022 Quarterly Pro Forma Forecast (S thousands) Otr f or: 2 Otr 3 or: 4 Net sales 300 375 3,200 5.000 Cost of sales (70 percent of sales) 210 263 2.240 3.500 Gross prot 90 1 13 960 1.500 Operating expenses 560 560 560 560 Prot before tax (470) (448) 400 940 Income taxes (1 88) (1 79) 1 60 376 Prot after tax (282) (269) 240 564 Cash (minimum balance = $200,000) 1.235 927 200 200 Accounts receivable (75 percent of quarterly sales} 225 281 2,400 3.750 Inventory (12(3101 balance = $500,000) 500 500 500 500 Current assets 1,960 1.708 3,100 4.450 Net plant & equipment 1.000 1.000 1.000 1.000 Total assets 2.960 2.708 4.100 5.450 Accounts payable (10 percent of quarterly sales) 30 38 320 500 Accrued taxes (payments quarterly in arrears) (188) (179) 160 376 Current liabilities (1 58} (1 42) 480 876 Longtemi debt 400 400 400 400 Equity (12(31121 balance = 33.000000} 2.718 2.450 2.690 3.254 Total liabilities and equity 2.960 2.708 3,570 4.530 External nancing required 0 0 530 920